Obama's choice: Higher gas prices, weaker economy

Peter Morici

Campaigning for office, President Barack Obama promised to do something about high gas prices, but now he is denying he can do much about what Americans pay to drive. He is too modest.

In September 2008, Steven Chu said to The Wall Street Journal: "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe" — and Barack Obama picked him to be secretary of the Department of Energy.

When President Obama was inaugurated, gas was selling for $1.90 a gallon, and it is now nearly $4. Not quite European levels, but doubling gas prices is a good start.

Mr. Obama says he needs four more years to change America. If he is re-elected, can we look forward to $8 a gallon?

Don't laugh. Messrs. Obama and Chu are good at what is economically imprudent.

Secretary Chu and President Obama share some rather radical notions — among them, that the nation has overinvested in oil and underinvested in solar, wind and other alternative energy sources.

The president has continued bans on drilling in the eastern half of the Gulf of Mexico; offshore on the Pacific and Atlantic coasts; and within the richest fields in Alaska. On top of that, he has thrown up onerous regulatory barriers to drilling where it is still legal.

Yet, Mr. Obama boasts U.S. oil production is up. How can we make sense of this claim?

It is true that — with crude oil prices doubling since 2005 — domestic oil production has increased a paltry 12 percent; it now stands at 5.8 million barrels a day. John Hofmeister, former chairman of Shell Oil, estimates that opening up U.S. proven reserves could raise U.S. oil production to 10 million barrels a day while still adhering to prudent environmental safeguards.

Contrary to what is often reported, U.S. oil prices do not move in lockstep with international prices because refineries are built to handle the special characteristics of the oil produced by their primary sources of supply. Hence, oil sells for less in the United States than, for example, in Europe (even accounting for Europe's higher gas taxes), and increasing U.S. production would lower refineries' acquisition costs — and gas prices.

Whatever Americans pay for gasoline, increasing domestic production to 10 million barrels a day would cut combined crude oil and gasoline imports in half — saving at least $150 billion a year. That money would be spent in the United States on cement, steel, engineering services and the like, and by my estimates, it would boost gross domestic product by $250 billion, create about 2.5 million jobs and lower unemployment to less than 7 percent.

Instead, the president says he needs to raise taxes on oil companies so that he can increase investments in solar and wind power — the basic supposition being that the private sector, which already benefits from numerous tax breaks to develop and sell alternative technologies, has not exploited all commercially sound opportunities.

Yet, given billions to invest directly, the best Secretary Chu could do was plow money into Solyndra and about a dozen other projects that independent Wall Street investment analysts advised would be "C" rated if offered in the bond market. ("C" is the rating assigned to companies with a 70 percent chance of default.)

Thanks to generous tax breaks, the private sector has already overinvested in solar, wind and other alternative energy resources while it is barred from adequately investing in oil production — even with the tax breaks to big oil Mr. Obama loves to rail against.

As importantly, the recent problems of the Volt and Leaf indicate the difficulties of switching to wholly electric cars. More-efficient internal combustion engines, like those being rolled out by Ford and Mazda; and hybrids, which also use gas but do so more efficiently, are where drivers will be for a long time.

Environmentalists should prefer domestic energy production, too. After all, the choices at present essentially are: Do Americans produce oil at home, where environmental risks can be effectively managed, or do they import oil from developing countries, where those risks may not be so effectively contained?

By choosing to keep and manage the risks at home, Americans can fire up growth and get unemployment closer to acceptable levels.

Peter Morici, a professor at the University of Maryland's Smith School of Business, is former chief economist at the U.S. International Trade Commission and a columnist whose work appears nationally. His email is pmorici@rhsmith.umd.edu. Twitter: @pmorici1.